Small Industries in India
Volume 19, Number 3 Article by Pradeep Banerjee September, 2007
Small Industries in India : By B Yerram Raju, Gitam Institute of Foreign Trade, Excel Books, New Delhi, 2004, pp 271, Price: Rs 290.:
The intuitive appeal of small-scale industry that stems from its feasibility has legitimacy conferred on it by the fact that it can absorb human resources in an employment hungry economy, enabling a greater degree of equity in the distribution of wealth that is generated in the society. It is not surprising, therefore, that this scale of operations has received significant support in discussions on economic development led by the state. Continuing the policy in the immediate pre-independence decades, the first few Indian Five-year Plans provided for small-scale operations in its plans for industrialisation of the economy. Subsequently, for a long period policy measures were continually introduced to support this sector. Certain identified industrial activities were even ring fenced and reserved for this scale of operations alone. With the Indian economy gaining from this sector over the years, small-scale industrial activities came to be recognised as a viable mode of industrialisation of the economy. However, the sector has had its share of problems at various levels. There have been reports of over-enthusiastic representatives enforcing compliance that hobbled small scale units which were ready to grow, and instances of the fence eating up the grass. Small-scale operations have had their fair share of redundant growth and also unit mortality. And with the economy being opened up, the problems of the sector may well multiply unless a proper mix of enabling policies is brought in by the state and a robustness of unit level management by its practitioners. The book under review focuses on the needs of the emerging context.
To set the tenor of its inquiry, the text lists a number of questions in the context of what is happening with the small scale industrial (SSI) sector in the prevailing economic environment. These questions concern the current and future growth possibilities of the sector, the impact that globalisation will have on the domestic small-scale sector, the changes that need to be carried out in the institutional framework to facilitate SSI extension and even find high growth areas for the sector, and the persistence of inadequate access to financial and other resources required for the healthy growth of SSI units, despite long run policy directives addressed at enabling sustained SSI development. The author believes that an attempt to answer these questions raises several issues of wider relevance in the current debate on developing more effective market strategies. The text starts with a review of SSI policy regimes that have been practised in this country and also in other countries. The review confirms that a determined role for the SSI sector in development planning has come to gather widespread appeal in both developed economies such as Japan and Korea and economies in transition such as China, Malaysia and India. SSI industrialisation has been a part of the drive for industrialisation of the economy and in most instances the sector receives inputs that ensure its sustainability. Some of the important points of discussion are the definitional attribute of what is deemed to be an SSI unit, and the measures used to support the sector, including ring fencing of SSI units to shelter them from competition, according fiscal breaks to these units, preferential purchase of SSI produce, and measures that work to reduce their receivables such that SSI units are protected from working capital squeezes. While these measures differ between economies, the underlying thrust at the policy level is one of enabling SSI units to scale up and thereby reduce their unit vulnerability.
In order to make certain that policy measures evolved for specific sectors are actually put into practice, states have introduced regulatory frameworks to ensure policy effectiveness and avoid policy and practice mismatch. The first section of the book covers the prevailing small scale industrialising policies in a number of economies, with a special emphasis on India, and the regulatory framework that has been put in place in India. The question that crops up here is whether, with sixty-four regulatory Acts related to SSI operations, the sector is not over-regulated. The experiences of entrepreneurs working in this sector, as recounted in the case studies included in the text, suggest that this is indeed so. The phrase ‘inspector raj’ is a typical expression summing up the conditions on the ground.
In conjunction with the policy regime and the regulatory framework, the state has initiated an institutional set-up to augment small-scale oriented industrialisation. Over the years, a number of government owned corporate bodies have been set up to facilitate industrial activities, with the government as the active partner and tasks focused on unit level industrial growth. This has led to the emergence of a three-tier structure. The Central Government, for instance, directs the SSI Board, the Small Industries Development Organisation, the Small Industries Service Institute, and the National Institute for Entrepreneurship and Small Business Development, among others. The State governments have their Directorates of Industries, the District Industries Centres, State Financial Corporations, and State Industrial Development Corporations, among others. In addition to these bodies, specialised institutes like the State Industries Development Bank of India, National Bank for Agriculture and Rural Development, Housing and Urban Development Corporation, and the Institute for the Design of Electrical Measuring Instruments have been set up to provide inputs to the growth and development of small-scale industrialisation. Working alongside these government run institutions are a number of private sponsored institutions and associations that represent the small-scale units in their deliberations about policy and practice of small-scale industrialisation. These include the Federation of Association of Small Scale Industries, the CII, the FICCI, the ASSOCHAM, and the Consortium of Women Entrepreneurs in India, among others.
The combined domains of all these institutions represent a significant reach in terms of both decentralised growth and the growth of specialised product manufacture. The second section of the book, which covers these aspects is, however, critical of their efficacy, pointing out to the ‘overhang of regulatory administration’ that afflicts many of the institutions and ill fits them for the task of enabling small-scale units to work in a market economy driven economic environment. This applies to the private domain institutions as well.
The next section deals with the financial inputs required for the growth and development of small-scale units. Citing empirical evidence that points to shortfalls in the timely availability of institutional finance, inadequacy in the release of the required quantum of working capital, and insistence on larger levels of collaterals, among others, the author shows how this aspect has negatively impacted the SSI sector. Incorrect ground level assessments and inadequate support have worked against the sector and led to a significant level of endemic sickness among SSI units. What then are the options for the future for this important plank of industrialisation is the concern of the final section, which also deals with the need for fiscal reform.
The text has surveyed an area that is well known. Although some important issues have been raised, such as the observation that it is essential ‘to have appropriate institutions in place… in the transition from state-directed economic activity to market driven growth’, the author has failed to elaborate on this through exhaustive research and reporting. It would have enhanced the contribution of the book if he could have made informed recommendations on, for instance, the desirable structures of such institutions and their place in the institutional environment that surrounds the SSI sector. There is an urgent need to provide answers to these and related issues, failing which the questions raised at the beginning about the prospects of the SSI sector will continue to remain unanswered, at a cost that the political economy may well be unable to support.
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